“I’ll be gone, you’ll be gone,” are six words dangerous words on Wall Street.
They get at one key reason why so many people took so many risks in the run up to the financial crisis of 2008: Sure, trades might have been risky, but if they soured, bonuses would already have been paid and people would have moved on to new jobs.
The incentive was to take risk to get paid now, regardless of the risk later on.
The 2010 Dodd-Frank financial reform legislation aimed to change that by requiring a group of financial regulators to write rules tying incentive pay -- bonuses -- to longer-term performance.
On Thursday, the National Associations of Credit Unions proposed a rule that would allow for bonuses to be taken back from bankers and traders even after they are delivered -- “clawed back” in regulatory jargon. Employees would have to forfeit their bonuses if they took too much risk, violated internal guidelines, breached regulations or caused the firm’s reputation to suffer. The rule would also require that at least 60 percent of bonus pay be deferred for between four and seven years, depending on the size of the firm.
Five other financial regulators, including the Federal Reserve and the Securities and Exchange Commission, are expected to offer similar regulations.
Importantly, the proposed rule would cover not just senior executives but also “significant risk-takers.” At many big financial firms, there are senior traders or bankers who responsible for significant risk taking but are not, for regulatory purposes, considered senior executives. For example, some commodities or mortgage traders have been paid more in a given year than the chief executive of the same firm.
The 2011 version of the rule, which was proposed but not implemented, would only have applied to senior executives. It's not clear how many financial employees would be covered by the proposed rule, but the definition it includes is very broad.
“This addresses the 'slash and burn' mentality that led to the financial crash, where you make a lot of money this year even if it burns down the bank next year,” Naylor told HuffPost.
In some ways, the rule doesn't go far enough. Naylor said he was disappointed the rule did not set aside money from bonuses to pay for future legal settlements -- meaning employees, rather than shareholders, would be monetarily punished when a bank paid out funds to regulators.
If that were the case, it would create “a dynamic where all the bank managers would be looking over each other’s shoulder to make sure no one is committing fraud,” Naylor said.
The rules are subject to a 90-day comment period. After that, it is up to each agency to determine how long to consider the comments before altering and implementing the rule.